The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the distribution options for most IRA beneficiaries. Leaving an IRA to a trust may have different consequences. In this first part of a two-part series, we will review two out of the five common questions about trust-inherited IRAs, and their answers.
A “see-through” trust meets the complex requirements needed for “see-through” status. This status allows the trust to be treated as a “person” for inherited IRA distribution option purposes. Without this status, the trust is limited to the distribution options for entities—lump-sum or five years. A see-through trust must:
By meeting these requirements, the trust may use the distribution options available to individual beneficiaries.
The same option available to an individual beneficiary of the trust may be available to the trust. The options will depend on whether a beneficiary is an Eligible Designated Beneficiary (EDB) or a Designated Beneficiary (DB). EBDs have the option of a life expectancy payout, with spouses able to recalculate their life expectancies each year. DBs are limited to having the account completely distributed by 12/31 of the 10th anniversary of the IRA account owner’s death. (For more information, consult Inherited IRAs—A Guide to Help Beneficiaries Who Inherit an IRA in 2020 or Later.)
It is easy to be confused, especially after the many years that inherited IRAs required annual distributions. The 10-Year Rule is simple. By 12/31 of the 10th anniversary year of the owner’s death, the inherited IRA account must be completely distributed. While many likely will choose to spread distributions over the 10 years for tax purposes, it is not required.
If the trust does not meet the see-through trust rules, then the distribution options are lump sum or five years.
Two additional notes:
Did you know that an inherited IRA could involve a ghost? Sometimes, a ghost life expectancy is a good distribution option. Look out for our next blog post, where we will discuss using a “ghost,” and answer more questions, including how taxes might affect decisions.
For more information on retirement-planning strategies, please contact the Retirement Strategies Group at (800) 722-2333, or email us at RSG@PacificLife.com.
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